The Absolute Return Letter, March 2014: A Century of Policy Mistakes

Link to: A Century of Policy Mistakes

A century ago Argentina ranked as one of the wealthiest countries in world. Today it is a shadow of its former self. A long string of policy errors explain the long slide from riches to rags. Europe, like Argentina 100 years ago, is facing enormous challenges - as well as potential pitfalls - and the management of those challenges will define the welfare path for many years to come. Unfortunately, the early signs are not good. Our political leaders, afraid to face public condemnation, have so far chosen to ignore them.

Stretching for the right people...

Comment from Charlie Munger about Iscar, via Whitney Tilson’s notes from the 2007 Wesco Annual Meeting:

It’s not a Ben Graham stock – in fact, it would be the ultimate non-Ben Graham stock. It’s located a few miles from the Lebanese border in Israel. It has a high ROE, doing business all over the earth, using a certain technology to produce carbide cutting tools. The reason I got so high on it so fast was that the people are so outstandingly talented. The idea of being in business with them just struck me worth straining for. We didn’t know when we were young which things to stretch for, but by the time we reached Iscar, which we never would have bought when we were young, we knew to stretch for the right people. It’s a hell of a business. Everything is right there. Isn’t it good that we keep learning? Better late than never.

Talks at Google: Secretary Hank Paulson: "Hank: 5 Years from the Brink"

Link to video: Secretary Hank Paulson: "Hank: 5 Years from the Brink"

Secretary Hank Paulson joins us in conversation about his new documentary. HANK: 5 Years from the Brink tells the story of how Paulson worked to persuade banks, Congress, and presidential candidates to support a nearly $1 trillion rescue package for the U.S. financial system during a time of unimaginable pressure and economic uncertainty.

Seth Klarman letter excerpts and summary

Via ValueWalk: Seth Klarman: Fed Created Truman Show Style Faux Economy

In his 2013 letter to investors, Baupost Group's Seth Klarman notes that the Fed has built a “Truman Show”-style faux economy, hates Bitcoin, returns $4 billion to investors

The Final Relaxo Lecture – by Sanjay Bakshi

Link to: The Final Relaxo Lecture – by Sanjay Bakshi

My BFBV course @ MDI got over in January 2014. One of the highlights of the course was a live case on Relaxo Footwear, a company in which I am invested. The case was initiated at the beginning of the course. On 15 September 2013, I posted a mail (The Relaxo Cinderella Project) to my students about the company. At the time, the stock price of the company was Rs 144 (on a 5:1 split adjusted basis). 

Then, on 22 September 2013, my friend Ravi Purohit and I gave a joint lecture on the company (The Relaxo Lecture) in which we explained our investment thesis. At the time, the stock was quoting at Rs 150. 

Finally, I spoke about the company again in my class on 10 January 2014. By that time, Relaxo’s stock price had increased to Rs 224. As I write this, it now stands at Rs 254. 

In this note, I am reproducing from my memory what I spoke on my 10 January class with some updated thoughts on the subject.

Ted Weschler's healthcare investing filters

In his CNBC appearance this morning, Ted Weschler mentioned the 3 filters he uses when investing in healthcare company stocks (and why he thinks DaVita passes all the filters):

1) Does the healthcare company deliver better quality of care than somebody could get anywhere else?

2) Does it deliver a net savings to the healthcare system? 

3) Do you get a high return on capital, predictable growth, and a shareholder-friendly management?

Warren Buffett on CNBC

Links to videos:

Where Buffett finds investment opportunities

How Buffett plans to take care of his widow

Joe's mentioned in Buffett's will

Buffett's appetite for another acquisition

Buffett's acting aspirations

Buffett: Unlikely to sell top 3 holdings

Buffett: Rails have 'real economic' advantages

Is Berkshire Hathaway 'too big to fail?'

Buffett: Earned income tax credit vs. minimum wage hike

Billionaire Buffett gives away $27 billion

Warren's wisdom: Don't hold money during a war

Buffett: We are not in a 'dangerous US fiscal situation'

Buffett's three T's

Buffett hints at successor

Meet Buffett's'Three T's'

Health careinvesting tips from Buffett's team

Activistinvestors in for quick buck, nothing wrong with that: Buffett

Charlie Munger is my man for CNBC's top 25: Buffett

...............

UPDATE: The transcript is available HERE.

Hussman Weekly Market Comment: Do Foreign Profits Explain Elevated Profit Margins? No.

Link to: Do Foreign Profits Explain Elevated Profit Margins? No.

The bottom line is simple. Corporate after-tax profits as a share of GDP, GNP (or even net national product if one wishes to use that number) are steeply above historical norms. This fact can be fully explained by mirror image deficits in household and government saving - a relationship that can be demonstrated across decades of historical evidence. As a result of a severe credit crisis and a sustained period of lackluster economic activity, we’ve seen a fiscal deficit (elevated transfer payments to households and shortfalls in tax revenue) combined with weak household saving. The combined effect is that companies have been able to maintain revenues while paying a very low share of income to labor and taxes. 

The role of international activity on profit margins is strictly secondary. Indeed, foreign profits of U.S. companies as a share of GNP have been contracting since 2007, are only about two-tenths of a percent above the 2009 low, and therefore do not have any material role in the surge in overall profit margins we’ve observed in recent years. Moreover, changes in foreign profits actually have a negative correlation with changes in domestic profits. Total profits as a share of national income have no natural reason to grow over time in any persistent way just because foreign profits have grown. 

Given the economic landscape of recent years, large offsetting sectoral deficits and surpluses are not surprising, but they should not be taken as evidence that the long-term profitability of the corporate sector has permanently shifted higher. Stocks are not a claim to a few years of cash flows, but decades and decades of them. By pricing stocks as if current profits are representative of the indefinite future, investors have ensured themselves a rude awakening over time. Equity valuations are decidedly a long-term proposition, and from present levels, the implied long-term returns are quite dim.

GR-NEAM Reflections: 03/01/2014 - Flowing Into the Cracks

Link to: Flowing Into the Cracks

Central bank policy has been successful, if judged by its intent of promoting risk taking. But the resulting distortions turn up in unexpected places.

Warren Buffett's 2013 Shareholder Letter

Link to: Warren Buffett's 2013 Letter to the Shareholders